Why Intellectual Property Rights as security for loans is correct in legal terms

In the case of Canara Bank vs NG Subbaraya Setty, the SC held that assignment of a trademark as a security for a loan outstanding is against the Trademarks Act and the Banking Regulation Act.

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Jun 20, 2018, 07.15 AM IST

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The court also stated that the assignment was against section 6 and 8 of the Banking Regulation Act. A bank cannot use a trademark to sell agarbattis.

By M Umarji

Recently the Supreme Court has ruled that a trademark cannot be assigned to a bank by a borrower who has defaulted on the loan. In the case of Canara Bank vs NG Subbaraya Setty, the Supreme Court held that assignment of a trademark — EENADU — for agarbattis, as a security for a loan outstanding is against the Trademarks Act and the Banking Regulation Act. The Supreme Court took the view that the trademark cannot be said to be property which has come into possession of the bank in satisfaction of any of the claims of the bank. Trademarks are not part of any securities for loans or advances.

The court also stated that the assignment was against section 6 and 8 of the Banking Regulation Act. A bank cannot use a trademark to sell agarbattis.

It cannot step outside the banking business. It can sell goods only to realise the security held by it.

It cannot allow 3rd parties to use the trademark and get a royalty. The court also noted that the bank manager, who accepted the assignment of the trademark, was dismissed and prosecuted.

It is respectfully submitted that the parties to the litigation should have viewed the entire matter in the context of provisions contained in the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act). Section 2(1)(t) of the SARFAESI Act defines the expression property and specifically includes intangible assets being knowhow, trademark, copyright, licence or franchise. Further section 2(1)(zf) defines “security interest” as a right, title or interest of any kind upon property created in favour of secured creditor and includes such right title or interest in intangible assets.

Further, the expression secured creditor is defined to include any bank or financial institution holding any right, title or interest upon any tangible asset or intangible asset as a secured creditor. It is respectfully submitted that in terms of the above provisions of the SARFAESI Act, the bank accepting assignment of any trademark as the security for a loan outstanding is the secured creditor having security interest over the trademark and is entitled to sell or assign the trademark for a royalty and recover the defaulted loan.

It is further submitted that all security interests created over property rights in favour of banks and financial institutions are transfer of interest or rights in the property and in the event of default in repayment of the loans secured by the security interest, the lenders have a right to sell the property and realise their defaulted loans. The same principles are applicable in respect of intangible property rights such as trademarks or copyrights or patents and licence to use the intangible property for a specified royalty has to be treated as equivalent to sale of secured assets to recover loan.

The object of making a clear provision facilitating creation of security rights over intangible properties is to facilitate availability of credit to intellectual property owners and other intellectual property rights holders, thereby enhancing the value of the intellectual property rights as security for credit. The intellectual property rights (e.g. translation rights of a bestseller book or patent for a drug for treatment of cancer or a well-established trademark for a best-selling product), have substantial value and the law needs to permit creation of security rights over such valuable properties to raise funds. The United Nations Commission on International Trade Law (UNCITRAL) has undertaken an elaborate exercise to prepare a legislative guide on secured transactions along with a supplement on security rights in intellectual property. The objective of the guide with respect to intellectual property is to promote secured credit for businesses that own or have the right to use intellectual property, by permitting them to use rights pertaining to intellectual property as encumbered assets without interfering with the legitimate rights of the owners, licensors and licensees of the intangible property.

Section 6(1)(f) & (g) of the Banking Regulation Act, clearly provides for dealing with any property or any right, title or interest in such property which forms the security for the loan. It is unfortunate that the above aspects of the legal status of creation of security or intellectual property rights were not brought to the attention of the Supreme Court while considering the assignment of trademark in favour of the bank. It is hoped that in a suitable case, the view taken by the Supreme Court is reviewed in the context of the provisions of the SARFAESI Act, so that lending against the security of intangible properties is facilitated. The UNCITRAL has also approved a model law on secured transactions for adoption by the member countries and India needs to consider enactment of Secured Transactions Law based on the UNCITRAL model, applicable to all secured lenders.

The author is Former Executive Director, RBI

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